The Trade Reform Act will further this coordination in several ways. The Act will provide the President with special balance-of-payments authority to increase or reduce trade barriers. The Act would specifically authorize the President to employ an import surcharge for the purpose of protecting our balance of payments and authorize him to reduce tariffs as one possible adjustment measure if we were to have a persistent surplus. This authority could also be used to protect U.S. interests vis-a-vis a chronic surplus country which had not taken effective adjustment measures.

FOREIGN INVESTMENT AND TAXATION

I would like to say a word about investment abroad by U.S. firms and the Administration's proposals for modification in the tax treatment of foreign source income. The rapid growth of international investment in recent yearsparticularly the growth in investment undertaken by multinational corporations has been a subject of great controversy at home and abroad. On balance, we believe that this investment has been beneficial to the American economy. Government studies show that it has improved the U.S. balance of trade and the overall balance of payments, and has meant more jobs for the U.S. economy. We cannot assume that discouraging foreign investment will promote investment and prosperity in the United States. On the contrary, if investment opportunities exist abroad, foreign firms will take them if American firms do not, which will lessen the flow of American-made goods into foreign markets. Our proposals for taxing foreign source income are shaped against that background. We believe our tax system should not be used as a club to inhibit foreign investment, because we believe that investment to be good on the whole. At the same time, we do not believe that our tax system or any other tax system should be permitted to induce American business to make foreign investments which they would not otherwise make.

Our existing system is designed to permit an American-controlled business operating in a foreign country to operate under the same tax rules applicable to its foreign competitors in that same country. We believe that is a fundamentally sound system and that we should not devise new rules designed to disadvantage American business with respect to its foreign competitors.

Our data show that our American enterprises abroad pay substantial foreign income taxes. In the vast majority of cases, it is business factors and not income tax factors which lead to foreign investment. Income taxes are not the case of our trade problem, and income tax changes will not solve that trade problem. For these reasons, we conclude that drastic surgery on our tax credit and deferral provisions relating to overseas investment is not justified.

The issues in this field are not new. In 1962, the Congress exhaustively reviewed this field and we believe the conclusions which it reached are fundamentally sound.

There are, however, three situations in which the existing tax system produces artificial distortions and incentives and which we ask that you change. The first two proposals relate to tax holidays and runaway plants, where we ask that you modify our tax system to neutralize tax inducements offered by other countries. The third proposal would eliminate the present ability of American firms to offset foreign losses against their U.S. income without ever paying U.S. tax on subsequent profits.

Tax holidays

A number of foreign countries presently attract U.S. investment by granting major tax incentives, such as extended tax holidays or cash grants that are not included in taxable income. To neutralize such practices, the Administration is recommending amendment of our tax laws so that earnings from new or additional American investments which take advantage of those inducements will be taxed to their U.S. shareholders as earned, rather than at the time they are remitted to these shareholders. Exceptions could be made by treaty. Runaway plants

Some American companies occasionally undertake foreign investments for the purpose of re-exporting a substantial share of their production to the United States. To prevent income taxes from inducing such decisions, the Administration recommends that in cases where new or additional foreign investment is made by a U.S.-controlled foreign corporation in a low tax country, earnings will also be taxed on a current basis if exports to the U.S. market account for more

than 25 percent of the corporation's total receipts. This rule would only apply when the effective rate of tax on the income of the controlled foreign corporation is less than 80 percent of the U.S. tax rate and exceptions would be permitted for particular situations if the President determines that it is in the public interest to do so.

Recovery of foreign losses

The Administration also recommends amendment of our tax laws (a) to reduce the credit for foreign taxes where foreign taxes are excessive because the foreign country has not allowed prior losses to be offset against subsequent profits; and (b) to recapture benefits of loss deductions where the legal form of ownership of an enterprise changes in such a way that future profits are insulated from losses previously taken against U.S. tax. This provision would also reduce the advantage of drilling for oil abroad and increase the relative attractiveness of domestic drilling.

CONCLUSION

We have joined with our major trading partners in a commitment for a new round of comprehensive negotiations scheduled to begin this autumn. Our negotiators will face a challenge and an opportunity.

The world economy must be fair for all nations. It must permit each nation to compete equally without artificial restraints in the international market. It must be flexible enough to prevent recurring monetary crises that distort trade and capital flows, injure our national economies, and create political tensions that harm the cause of peace. Such a world economy will especially benefit the United States. We wish to achieve this objective not through confrontation, but through negotiation in a spirit of cooperation and progress with the other trading nations.

We ask Congress to join with us in this effort. We stand ready to work out a new cooperative relationship, and to utilize new institutional procedures to assure that the Congress and the Executive work together to achieve our mutual objectives.

We must and we will approach the trade negotiations with a tough mind and a clear resolve that American interests will be properly looked after.

We believe that the legislative program now before you will give us the tools to do the job. I urge its speedy enactment.

The CHAIRMAN. Thank you, Mr. Secretary.

We will hear from the Secretary of State, Mr. Rogers. We are glad to have you with us. You are recognized.

STATEMENT OF HON. WILLIAM P. ROGERS

Secretary ROGERS. Mr. Chairman and members of the committee: I appreciate very much this opportunity to appear before the committee.

The Trade Reform Act which you are now considering has two essential purposes: First, to insure the continued prosperity of the American people; and second, to help build a more stable and secure world by developing closer economic ties among all nations.

Some seem to believe that these two purposes are mutually inconsistent; that we must choose one or the other. We hear it said that America's prosperity is threatened by our growing economic ties with other nations and by the cost of our involvement in building a more secure world.

The bill before you is based upon just the opposite view. We believe that our prosperity is increasingly dependent upon closer economic ties with other nations. And we believe that the United States can only remain completely prosperous in a more secure, interdependent and peaceful world.

By pursuing these objectives, we will create more, rather than less, jobs for American workers. And by working to improve relations with our adversaries and to share more equally the common burden with our allies, we hope to lighten the burden on the American taxpayer of our engagement abroad. This will be possible because the nature of our economy and our international role are changing.

Following World War II, the United States accepted a major share of the responsibility for the economic recovery of our friends and the common defense against our adversaries. At that time, we had an enormous competitive edge in trade, with one of the world's few sound economies, an economy which was very largely self-sufficient.

The situation today, as Secretary Shultz said, is substantially different. First, the possibilities of peaceful and mutually beneficial coexistence with the Communist countries have improved. The old image of a bi-polar world, with the free and the Communist worlds confronting each other as antagonists across every froniter, is no longer the real situation.

Second, other countries have grown into economic powers somewhat more comparable to the United States. The combined gross national product of the nine-member European Community was 70 percent that of the United States in 1972. Similarly, Japan's output as recently as 1967 was one-seventh that of the United States, but in 1972 it was one-fourth.

The United States has also grown immensely more prosperous. In fact, over the past decade, the absolute growth in our per capita income exceeded that of Japan and the other developed countries. But we can no longer take for granted our competitive edge in trade. Our businesses and Government policies must now become more export minded to keep pace with the greater import needs of our industries and

consumers.

To many, these may seem unfortunate developments, but not if they are put in the proper perspective. For many decades, our best trading partners and our main competitors-Canada, Japan, and Western Europe-have been neither economically self-sufficient nor complacent about their ability to compete. They have prospered by exporting those goods which they produce more efficiently and importing from others goods produced more efficiently elsewhere.

Almost without noticing it, we have also begun to benefit from a greater involvement in international trade. The proportion of our total production sold abroad is steadily increasing. Today about 14 percent of our industrial production and 31 percent of our agricultural crops are exported, creating millions of jobs and supporting major segments of our economy. The increasing significance of imports is evident to everyone. Without growing imports of petroleum and raw material resources, our economy cannot expand. As consumers, all Americans benefit from the savings and variety provided by imports. Increased imports dampen rather than increase domestic inflation.

This process of mutual growth and greater interdependence with our major allies has brought with it problems as well as benefits.

A monetary and trading system founded on American economic predominance obviously requires adjustment in a more balanced and integrated world economy. A quarter century of American balance-ofpayments deficits fueled the world's economic growth. But these defi

cits combined with an overly rigid monetary system to finally cause heavy demands upon the dollar, erosion of our competitive position, and for the first time in this century, a deficit in our trade balance.

As the Secretary of the Treasury has said, we are determined to correct this situation. We have already taken dramatic action to revalue the dollar, making our exports substantially more competitive. We are making significant progress toward a more equitable, flexible, and stable monetary system.

We have also begun to make progress in trade. Japan, the European Community and other industrialized countries have agreed to join us in far-reaching multilateral trade negotiations this autumn. Prime Minister Tanaka and President Nixon pledged in their communique last September to actively support trade negotiations covering both industry and agriculture. Prime Minister Tanaka agreed to work vigorously for a better equilibrium in the trade balance with the United States. And the heads of government of the European Community stated last October that they attach major importance to the upcoming trade negotiations.

We want to make the next round of trade negotiations as significant as the last. Since the Kennedy round concluded in 1967, after reducing trade barriers an average of 35 percent, world trade has nearly doubled. To defend and further America's economic interests in these trade talks, our negotiators must have the same authority as their European and Japanese counterparts. This is one of the major reasons why trade legislation is required, we believe, at the earliest possible date.

Nothing is more important to the overall success of our foreign policy than for us to receive a mandate now to further our international economic interests, for these economic interests are intimately related to our political and security concerns throughout the world.

With our allies in Europe and Japan, economic tensions could develop in a way which could affect the entire fabric of our political and defense relationship. Properly managed, economic negotiations should lead to a greater willingness and ability of our allies to shoulder a more equal share of the common burden. Left to smoulder or fed by a spirit. of confrontation, these tensions could weaken the alliance, which is such an important factor in our national security.

We must not allow this to happen. With American encouragement, our allies have begun to shoulder a larger portion of the defense burden. Since 1970, our NATO allies have increased their defense expenditures by 30 percent. They now provide 90 percent of NATO's ground forces, 80 percent of its seapower and 75 percent of its air forces. Our joint success in moving from confrontation to an era of negotiations with our adversaries has allowed the United States to devote a substantially greater share of its resources to domestic concerns. Since 1968, we have reduced the portion of our GNP devoted to defense from 9 percent to about 6 percent.

As we negotiate differences with our allies, we must not forget that our economic interests coincide far more than they diverge. All of our countries that we deal with, all of our trading partners have problems adjusting to the growing impact on domestic economies of rapid shifts in trade, shifts largely created by greater global economic

integration. While some have lost faith in our ability to compete, the Japanese and Europeans are constantly concerned that the United States will flood their markets with our more efficiently produced goods.

Thus, we have a common interest in agreeing on the safeguards proposed by this bill, safeguards which would assist workers and industries to adjust to sudden, massive, or unfair disruption by foreign goods. And in other areas of trade as well, we must all devise and accept new rules and obligations, for none of us can afford a trade war any more than a military conflict.

We should approach the challenges presented by our new economic situation with confidence and traditional American enthusiasm for competition. Our businessman, workers, and farmers should seize the great opportunities which are being opened by revaluation of the dollar and the prospect of more equitable trade relations with Japan, Canada, and the European Community.

Mr. Chairman, this bill is equally important for our relations with the Communist nations. While extensive East-West economic ties are not, by themselves, sufficient to create a more peaceful relationship, they are an indispensable ingredient. Without normalizing our economic relations, normal political relations are clearly difficult, if not impossible. During 1972, we took dramatic initiative toward China and the Soviet Union. To build these initiatives into a permanent structure of peace, we must now begin to weave a network of mutual interests in trade, technology, and resource development.

Hardly anyone questions the political advantages of building closer economic ties with the Communist nations, particularly if they are built on a reciprocal basis. However, we must keep in mind that our economic relations with the non-Communist developed and developing nations are much more substantial than our economic ties with the Communists. This will remain true for the forseeable future. We have a balance of trade surplus with the Communist nations, and expect that this will continue indefinitely, easing our overall trade deficit. We want to place our businessmen in the same competitive position in these growing markets as the Europeans and the Japanese. Today, Western Europe has 10 times as much trade with Eastern Europe as we do. Japan is in substantially the same position with both the Soviet Union and China.

Extension of MFN status to the Communist nations as proposed by this bill, would be a major step toward political and economic normalization. It would not grant them exceptionally favorable treatment, for we, as you know, extend MFN status to all of the countries with whom we have substantial trade.

Mr. Chairman, I am aware of the continued, active interest by the Congress in Soviet emigration practices. I share your deep concern about this matter both officially and personally. But I believe the best hope for a satisfactory resolution of this issue will come not from the confrontation formal legislation would bring about, but from a steady improvement in our overall relations with the Soviet Union.

As these relations have improved in recent years, we have witnessed a significant and favorable evolution in Soviet emigration policy. An unprecedented 60,000 Soviet Jews have been able to emigrate. I